RBA warns banks, households to be careful

The Reserve Bank of Australia has warned banks and households to remain prudent with their lending and borrowing practices in the current record-low interest rate environment.

The central bank says Australian households continue to show prudence in managing their finances compared with 10 years ago, with a higher rate of saving and a slower pace of credit growth.

In its half-yearly Financial Stability Review, released on Wednesday, the RBA said households were taking advantage of low interest rates by paying down their existing debt.

And, it urged banks and households alike to maintain current standards.

"There are some signs that households are taking on more risk in their investment decisions," the RBA said.

"The potential for a further increase in property gearing in self-managed superannuation funds is a development that will be monitored closely by authorities for its implications, both for risks to financial stability and consumer protection.

"While increased financial risk-taking is an expected outcome of lower interest rates, it is important that households understand, and appropriately account for, the financial risks they take.

"Given that household indebtedness and gearing are still around historically high levels, continued prudent saving and borrowing behaviour would help support households' ongoing financial resilience."

The RBA said data showed that banks had broadly maintained their lending standards since late 2011, although the share of high loan-to-valuation ratio approvals by smaller institutions such as credit unions and building societies was trending upwards.

"The relatively modest rate of growth in credit, and hence bank balance sheets, poses a strategic challenge for Australian banks," the RBA said.